My S.W.O.T Analysis For Dutech Holdings (CZ4)

Dutech is quite an interesting company that is worth taking a look into. Its share price has been relatively muted for many years and has only begun taking off after the 2015 Annual Report that was published on 27 February 2016. Dutech’s business operates in two segments, one being ‘High Security’ and the other being ‘Business Solutions’. You might be interested to know that they are the ones who manufacture ATM machines for banks! Let’s dive right into the analysis!

Strengths

Sales in USD, Cost in RMB

Healthy Financials

Alignment of Shareholders’ Interest

Supplier To A Growing Market

Sales in USD, Cost in RMB

With cost being largely denominated in RMB and sale made in USD, Dutech stands to enjoy the extra benefits from the forex differences. Dutech is able to keep cost low and sell for as much as they can! If you think this doesn’t mean much, consider this. In 2014, currency translation amounted to a 13.7% difference in net profits. It’s quite a big deal!

Healthy Financials

Dutech’s Current Assets are worth RMB619m with RMB240m in cash while its Total Liabilities stand at only RMB259m. I’m not worried about this company going bankrupt. It’s cash holdings alone can pay off almost all of its liabilities!

Alignment of Shareholders’ Interest

If you take a look at my S.W.O.T analyses of other companies, eg. (Sheng Siong and Wee Hur), you would have noticed I place quite a bit of emphasis on this. Dutech’s CEO and Director collectively hold 58.55% of the company! With so much skin in the game, I don’t think they will make silly decisions. In fact, another majority shareholder of Dutech, Robert Stone, has been increasing his stake by about 2m shares per year for the past 3 years. (NextInsight – Robert Stone)

Supplier To A Growing Market

“For our High Security Segment, the global ATM market is expected to reach U$21.9 billion by 2020, according to a report, “Global ATM Market – Size, Industry Analysis, Trends, Opportunities, Growth and Forecast, 2013-2020”, by global market intelligence firm Allied Market Research. Further, the Asia-Pacific region is forecasted to have the fastest growth rate with a CAGR of 10.6% during that period. For our Business Solutions Segment, the global vending machine market is slated to grow at a CAGR of 14.4% over the period 2014-2019″ – 2015 Annual Report

Weaknesses

Constant Need For R&D

To stay ahead of the game, the Management has been increasing its spendings on R&D to meet the high security standards and customers’ demands. In fact, R&D expenses increased by 8.6% in 2015 and will only continue to grow through the years. This is a cost centre that needs to be constantly outweighed by the benefits of new products. While I’ve categorised constant need for R&D as a weakness, it is a necessary cost and also why Dutech can remain relevant in the industry.

Opportunities

Presence of Growth Catalyst

Dark Horse Making The Difference

Declining Raw Material Prices

Presence of Growth Catalyst

“The global markets for ATM safes are set to continue to expand, driven by the growing banking networks in developing countries. Based on a forecast by global industry research firm Retail Banking Research (“RBR”), the number of ATM systems will increase worldwide to 3.7 million by 2018, compared with the existing 2.6 million in 2014” – Annual Report 2014

Dark Horse Making The Difference

The Business Solutions segment has been on a massive growth and it is the segment we should really keep our eyes peeled on. This could be the segment that changes the whole game for Dutech. If it keeps growing at such rates, it will compare to the High Security segment in 1-2 years time!

Declining Raw Material Prices

Cheaper raw materials, higher gross profit margins! GPM grew from 22% in 2012 to 29% in 2015. Money saved on cost can be channelled towards other areas like R&D or acquiring new companies such as Format, DTMT and Krauth. Their successful turnaround of Format keeps many investors hopeful that they are able to turn whatever they touch into gold. In fact, DTMT is already showing signs of turning around. Narrowing losses from 10m to 2m thus far after the acquisition. (Read here: CIMB Research)

Threats

Failure To Capture Market Share

We saw in ‘Opportunities’ how global markets for ATM safes are set to expand from 2.6 million in 2014 to 3.7 million by 2018, representing almost 50% increase in safe demand. However, we haven’t seen anything positive from the revenue contribution of the High Security segment.

Conclusion

Dutech is in a good position to enjoy the growth in the global ATM market that has growth trajectories up to 2020. Apart from being able to participate in an environment of growth, Dutech has the support of a strong balance sheet to take advantage of the opportunities that may arise from time to time such as DTMT and Krauth. Valued at only 6.4x P/E, Dutech definitely still has room to grow.

Aloysius Lee

Aloysius has been investing in Singapore Equities from the age of 18 and is still madly enthusiastic about it. He strives to sharpen his edge while guiding others along the way to snowball their way to financial freedom!

Yes, definitely! Not only are they creating a moat around themselves with all the patents, they are meeting some very stringent global standards! Being CEN IV-certified and UL-certified, Dutech gives assurance of quality and sets a very good impression as a supplier.